If you have been through a wrongful death lawsuit in New Mexico, you may not even think about the tax implications. This is a common error. You may be focused on the death of your loved one and resolving the lawsuit. However, the IRS is always focused on collecting taxes due. In some cases, you may have to pay taxes on money you receive as part of a court ruling or settlement in a wrongful death case.
The Nest explains that in most cases, the money won in a wrongful death judgment is not taxable. However, there are exceptions. It all depends on the type of damages you have been awarded.
The IRS will classify them as part of the estate, too. What this means is if you receive a very large award worth millions of dollars, you may be charged estate taxes on the money. Typical damages do not usually amount to enough to qualify for estate taxes, but it is something to keep in mind.
In addition, any punitive damages are seen as income by the IRS and taxed accordingly. Punitive damages are those that punish the defendant in a case. For example, if your loved one died in a nursing home and the judge orders the nursing home to pay a certain amount of money as a punishment to deter future similar actions, then this money is punitive damages.
The good news is that most damages awarded to you will be compensatory, which means they compensate for your loss. These are not taxed by the IRS. This information is for education and not legal advice.